Too many breweries in West Michigan?
Industry experts say recent closings are part of normal cycle.
(As seen on WZZM TV 13) Mitch Ermatinger’s business model raises eyebrows, as speculation grows in regard to West Michigan reaching a saturation point of breweries, with several closing in the state during the past year.
The owner of Speciation Artisan Ales sells tickets for batches of bottles once a month out of his Comstock Park brewery. Since his first release in January, he’s seen tickets sell out quicker than the last, with March’s gone in 40 seconds. His wild ales also have pushed him into the top 20 world rankings on the beer-rating app Untappd.
Industry professionals, including Ermatinger, expect to see more brewery closings, but the wave is not a bubble bursting, he said. The number of breweries in the United States has jumped to more than 5,000 in 2015, doubling since 2012, up from 1,500 in 2007 and exponentially higher than the all-time low of 89 in 1978.
The all-time high was just passed in 2015, surpassing the 1873 high of more than 4,000 breweries in the U.S., when the nation had far fewer people.
The quick surge is the weak point of growth, Ermatinger said, as he points to the more than 9,000 wineries in the U.S.
“We will see more closings because there was a big rush of people getting into this industry all at once, and they can’t all succeed. It’s a business, and not all businesses succeed,” he said. “Many will fail because they weren’t managed properly, marketed properly or didn’t make good beer.”
Last week, Spring Lake’s Dutch Girl Brewery closed permanently and is searching for a buyer and asking $350,000, according to a Facebook post. Dutch Girl representatives declined to speak to the Business Journal.
Closings have happened in West Michigan in the past, especially following a large burst of brewery growth in the late 1990s, which resulted in companies such as Founders Brewing Co. and New Holland Brewing Co.
Despite the recent popularity of beer, Grand Rapids has lost breweries, such as Robert Thomas Brewing Co., Arena Brewing Co., Hair of the Frog and more, said David Ringler, owner of Cedar Springs Brewing Co.
Ringler also believes more closures are coming, and he sees similarities to the industry in the late 1990s, which he watched closely.
“It already is and always has been normal,” he said. “This is a tough business, despite the appearance of success with many new openings. This is very similar to the pattern we saw in the late 1990s, when the pace of brewery openings grew exponentially and a number of them ultimately failed, but also saw great success stories emerge.”
A more likely scenario as breweries continue to close is an industry “normalizing,” said Bart Watson, chief economist with the Brewers Association. Watson said brewery openings nationwide still far outpace closings, and in 2014, he wrote a column detailing why closures are a signal of competition and not a problem. In recent years, the Brewers Association has placed an added emphasis on quality beer and acknowledged many breweries making bad products are detrimental to the industry.
Watson cited an Ohio State University study that found 60 percent of restaurants close within the first three years.
“It’s been the current period, where everyone succeeds, that has been unusual,” Watson said. “In what industry do no businesses close? Small breweries have done much better historically due to sharp rises in demand, but in a more competitive era with slower growth, it makes sense that closings would rise, even if the overall industry is still largely healthy.”
Among the characteristics Watson noted for potential failure of small breweries includes the many challenges all small businesses face: long hours, business strategy, lower-than-expected profits or longer horizon to profitability than expected, and under capitalization.
“I wouldn’t expect it to be the last closing in a highly competitive market like Grand Rapids, but that’s normal,” Watson said of Dutch Girl’s demise.
As the beer industry and its consumers have matured, the challenge to open and stay open has increased, Ringler said. Like Watson, Ringler cited many of the same small businesses challenges as potential points of closure.
There are others in the area struggling, and the belief a brewery can open and automatically experience a windfall of cash is changing, he said. The industry is not for those looking for a hobby, impressing friends for a quick buck.
“Recently opened breweries — including ourselves — are ‘buying high’ at the top of the market. Equipment is more expensive. Price pressures are greater. Distribution is very difficult and expensive. Consumers are more educated and discerning,” Ringler said. “New places don't have the grace period of the early brewers to stub their toes or dial in quality as perhaps happened at times in the past. “Consumers expect you to be really good, and they expect it right now. People are always curious to try out new places, but the key is making it worth their while to come back or to choose your product again.
“Cash flow is king in any business, and if the model doesn't produce enough cash flow, no business is going to survive, whether that be a neighborhood taproom or a large, regional brewer.”
Ermatinger didn’t foresee his batches selling out so quickly and only planned for about 50 percent of the product to be sold within the first several months. His low overhead has been a blessing many times over, but he expects he’ll have to open a tasting room for long-term success.
The future of breweries is unlikely to see more like Founders Brewing, which has grown to be the 16th-largest brewery in the U.S. in less than 20 years, but to continue to be small breweries catering to small populations and specific beer styles.
“The future of craft beer is in small breweries that either focus on one or two styles or serve the local population with a good variety of quality beers,” Ermatinger said. “Not every new brewery needs to have a niche business model or product, but I think it’s kind of inevitable that it will happen in the bigger cities.
“You can already see this happening here and other beer cities like Denver, San Francisco, Portland and Asheville.”